convertible notes, page-5

A convertible note allows the lender to have his cake, and eat it too.

The lender lends the company $115m at 6.85% interest. This is a normal commercial loan, with payment dates for the interest specified, and repayment dates for the principal detailed.

However, the risk is greater for this sort of enterprise than for lending to, say BHP, WOW, or Nissan. The company has no income stream untill all the loan has been spent, it is a one project company, sovereign risk is involved etc. etc. There is certainly mitigation of some of the risk in LYC's case because of the uniqueness of the product, the mine and its location in WA (at the moment, the whole world relies upon Chinese mines for supply, so the whole world is subject to Chinese sovereign risk as evidenced by the fact that both mines were closed in May; for different reasons. So ironically sovereign risk could work in LYC's favour).

To compensate for this risk, the lender has the option to benefit from the potential success of the project by converting the loan to shares at an agreed rate on certain dates, possibly with other qualifying conditions. In this instance it will mean the issuance of up to 74m more shares for repayment of the capital, plus a few million more for payment of interest instead of cash at the company's option. This is a dilution of about 14% on the existing share structure.

However, one should note that if the capital was to be raised by a pure equity issue, the shares would be issued at a discount to the current VWAP (volume weighted average price) to balance off the dilution effect, so you would probably have had 115m shares issued at $1, and the dilution would have been greater, 21%. Of course, you will always find somebody who will complain about any deal, saying that the conversion price should have been higher, or only half the loan should be convertible, but generally speaking these are people who are not willing to lend the company $115m on any terms. For me, I am very happy with the deal. A 14% dilution to get Lynas to a producer is quite acceptable.

Please remember that the reason for this CR is because the Chinese made it unattractive to process the ore in China. Malaysia was not the original plan for LYC. We are bearing the dilution for the greater gains to be had from selling REEs in the free market.